The Bank of England’s Monetary Policy Committee (MPC) voted by a majority of 5–4 to keep the Bank Rate at 5.25% in its meeting ending on 20 September 2023.
The Bank Rate is the single most important interest rate in the UK, as it influences the rates that banks charge people to borrow money or pay on their savings.
The MPC sets monetary policy to meet the 2% inflation target, and in a way that helps to sustain growth and employment. The Bank of England said that inflation is expected to remain above the target in the near term, reflecting higher energy and food prices, and that there is “still some way to go” in the fight against inflation.
The Bank also said that the UK economy has slowed down in recent months, partly due to supply chain disruptions and labour shortages, and that the outlook remains uncertain due to the Covid-19 pandemic and the transition to a new trading relationship with the EU.
Dorchester Chamber President Steve Bulley said: ” This move is expected to reinforce the view that we have reached the peak for interest rates. The impact of this decision on small businesses is not straightforward. It is generally believed that higher interest rates lead to increased borrowing costs for small businesses, which can negatively affect their cash flow and profitability. On the other hand, higher interest rates can also lead to a stronger currency, which can benefit small businesses that import goods or services.
“It is important to note that the Bank of England has been raising interest rates to tackle inflation, which has been rising sharply since March 2021. The decision to hold interest rates at 5.25% is expected to provide some relief to small businesses that have been struggling with rising costs. However, small businesses need to keep a close eye on the interest rate environment and take appropriate measures to manage their finances.”
The Bank of England’s decision and commentary contrasted with the US Federal Reserve, which signalled that it could cut interest rates by 0.75 percentage points next year, as it expects inflation to moderate and growth to remain strong.
The Fed’s chair, Jerome Powell, said the US is “likely at or near its peak for this tightening cycle”. The difference in monetary policy stance between the two central banks could have implications for the exchange rate between the pound and the dollar, as well as for the global financial markets.
The Bank indicated that interest rate cuts are still some way off by including a particular wording in its statement.
“The MPC will continue to monitor closely indications of persistent inflationary pressures and resilience in the economy as a whole, including a range of measures of the underlying tightness of labour market conditions, wage growth and services price inflation. Monetary policy will need to be sufficiently restrictive for sufficiently long to return inflation to the 2% target sustainably in the medium term, in line with the Committee’s remit. As illustrated by the November Monetary Policy Report projections, the Committee continues to judge that monetary policy is likely to need to be restrictive for an extended period of time. Further tightening in monetary policy would be required if there were evidence of more persistent inflationary pressures.”
You can find the Bank’s statement here
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